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Note 4 - Revenue Recognition
 6 Months Ended
Jul. 31, 2021
Notes to Financial Statements  
Revenue from Contract with Customer [Text Block]

Note 4 - Revenue recognition 

 

The Company accounts for its revenues under Accounting Standards Codification ("ASC") Topic 606, "Revenue from Contracts with Customers".

 

Revenue from contracts with customers:

 

The Company defines a contract as an agreement that has approval and commitment from both parties, defined rights and identifiable payment terms, which ensures the contract has commercial substance and that collectability is reasonably assured.

 

The Company’s standard revenue transactions are classified into two main categories:

 

 

1)

Systems and Coating - which include all bundled products in which Perma-Pipe designs, engineers, and manufactures pre-insulated specialty piping systems, insulates subsea flowline pipe, subsea oil production equipment, and land-lines. Additionally, this systems classification also includes coating applied to pipes and structures. 

 

 

2)

Products - which include cables, leak detection products, heat trace products, material/goods not bundled with piping or flowline systems, and field services not bundled into a project contract.

 

In accordance with ASC 606-10-25-27 through 29, the Company recognizes specialty piping and coating systems revenue over time as the manufacturing process progresses because one of the following conditions exist:

 

 

1)

the customer owns the material that is being insulated or coated, so the customer controls the asset and thus the work-in-process; or

 

 

2)

the customer controls the work-in-process due to the custom nature of the pre-insulated, fabricated system being manufactured as evidenced by the Company’s right to payment for work performed to date plus seller’s profit margin for products that have no alternative use for the Company.

 

 Products revenue is recognized when goods are shipped or services are performed (ASC 606-10-25-30).

 

A breakdown of the Company's revenues by revenue class for the three and six months ended July 31, 2021 and 2020 are as follows (in thousands):

 

  

Three Months Ended July 31,

  

Six Months Ended July 31,

 
  

2021

  

2020

  

2021

  

2020

 
  

Sales

  

% to Total

  

Sales

  

% to Total

  

Sales

  

% to Total

  

Sales

  

% to Total

 

Products

 $4,548   11% $1,703   8% $7,135   11% $6,168   14%
                                 

Specialty Piping Systems and Coating

                                

Revenue recognized under input method

  13,999   35%  9,784   48%  23,952   37%  18,346   43%

Revenue recognized under output method

  21,257   54%  8,877   44%  33,140   52%  18,592   43%

Total

 $39,804   100% $20,364   100% $64,227   100% $43,106   100%

 

The input method, as noted in ASC 606-10-55-20, is used by the U.S. operating entities to measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract over time. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the input method is the most faithful depiction of the Company’s performance as it measures the value of the goods and services transferred to the customer. Costs include all material, labor and direct costs incurred to satisfy the performance obligations of the contract. Revenue recognition begins when projects costs are incurred. 

 

The output method, as noted in ASC 606-10-55-17, is used by all other operating entities to measure revenue by the direct measurement of the outputs produced relative to the remaining goods promised under the contract. Due to the types of end customers, generally these contracts require formal inspection protocols or specific export documentation for units produced, or produced and shipped, therefore, the output method is the most faithful depiction of the Company’s performance. Depending on the conditions of the contract, revenue may be recognized based on units produced, inspected and held by the Company prior to shipment or on units produced, inspected and shipped. 

 

Some of the Company’s operating entities invoice and collect milestones or other contractual obligations prior to the transfer of goods and services, but do not recognize revenue until the performance obligations are satisfied under the methods discussed above. 

 

Contract modifications that occur prior to the start of the manufacturing process will supersede the original contract and revenue is recognized using the modified contract value. Contract modifications that occur during the manufacturing process (changes in scope of work, job performance, material costs, and/or final contract settlements) are recognized in the period in which the revisions are known. Provisions for losses on uncompleted contracts are made in contract liabilities account in the period such losses are identified.

 

Contract assets and liabilities:

 

Contract assets represent revenue recognized in excess of amounts billed (unbilled receivables) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Contract liabilities represent billings in excess of costs (unearned revenue) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Both customer billings and the satisfaction (or partial satisfaction) of the performance obligation(s) occur throughout the manufacturing process and impacts the period end balances in these accounts.

 

The Company anticipates that substantially all costs incurred for uncompleted contracts as of  July 31, 2021 will be billed and collected within one year.

 

During the year ended  January 31, 2021, one of the Company's customers in Qatar made a call on a performance bond held to secure one of the Company's contracts. The Company believes the customer's claims of non-performance under the contract are invalid and that the customer's actions were themselves a breach of the contract. The Company has engaged local counsel to seek reimbursement as well as additional compensation for lost profits suffered as a result of cancellation of certain work orders under the contract. The Company has recorded the expense related to the encashment of approximately $0.6 million in other income in the consolidated statement of operations for the year ended January 31, 2021. No receivable has been recorded related to the potential reimbursement in the consolidated financial statements as of July 31, 2021.

 

The following table shows the reconciliation of the cost in excess of billings: 

 

(In thousands)

 

July 31, 2021

 

January 31, 2021

Costs incurred on uncompleted contracts

 

$ 20,705

 

$ 17,543

Estimated earnings

 

10,986

 

9,651

Earned revenue

 

31,691

 

27,194

Less billings to date

 

31,759

 

23,949

Costs in excess of billings, net

 

$ (68)

 

$ 3,245

Balance sheet classification

    

Contract assets: Costs and estimated earnings in excess of billings on uncompleted contracts

 

$ 1,713

 

$ 4,007

Contract liabilities: Billings in excess of costs and estimated earnings on uncompleted contracts

 

(1,781)

 

(762)

Costs in excess of billings, net

 

$ (68)

 

$ 3,245

 

Substantially all of the $1.2 million contract liabilities balance as of January 31, 2020 was recognized in revenues during 2020 and substantially all of the $0.8 million contract liabilities balance as of January 31, 2021 is expected to be recognized in revenues during 2021.

 

Additionally, included in prepaid expenses and other current assets on the consolidated balance sheet, the Company has recorded $3.4 million and $0.2 million of unbilled receivables as of July 31, 2021 and January 31, 2021, respectively, from revenues generated by its Middle East subsidiaries.

 

Practical expedients:

 

Costs to obtain a contract are not considered project costs as they are not usually incremental, nor does job duration span more than one year. The Company applies the practical expedient for these types of costs and as such are expensed in the period incurred.

 

As the Company's contracts are less than one year, the Company has applied the practical expedient regarding disclosure of the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period.